Motgage Definitions

If you are looking to buy a home, you will more than likely need a mortgage to help pay for it. It`s important that you know what kind of mortgages are available and what type is best for you and your financial situation. Here are some terms and definitions associated with acquiring and paying off a mortgage. Brush up on your Mortgage Know-How before it`s time to sign on the dotted line.

Basic Definitions

Mortgage - A long-term loan primarily for the purpose of buying a home. A mortgage is a legal agreement in which the borrower pledges the property being purchased as security for the loan. The home itself becomes the collateral.

Principal - The amount of money that the borrower owes for the mortgage loan, specifically the cash that is borrowed from the bank.

Buy down rate - The portion of the interest rate on a buyer's mortgage that you assume when they buy your home. If you're selling your home and the prospective buyer doesn't like the interest rate on their mortgage, you can offer to add a certain percentage of it onto your existing mortgage.

Mortgage Term - The number of months or years the mortgage covers. Normally, it will be anywhere from six months to five years.

Compound Interest - The interest paid on the principal balance in a mortgage and on the accrued and unpaid interest of the loan.

Amortization - The actual number of years it will take to repay the mortgage in full. This is usually much longer than the term of the mortgage.

Bridge Financing - A special short-term loan needed to cover the time gap between completing the purchase of a property as agreed, and finalizing arrangements to pay. Usually occuring when two properties are involved and the closing dates are different.

Equity - The difference between the amount for which the property could be sold and the amount you still owe on the loan. This difference is the amount a homeowner actually owns outright.

Mortgage broker - A company or individual who helps the homeowner find the right financing to buy a property. A broker does not actually lend money but seeks out a lender and arranges the mortgage terms by negotiating with the lender for the best possible deal for the homebuyer.

Private mortgage insurance (PMI) - A special type of loan insurance that many lenders require you to purchase if the your down payment is less than 20 % of the home's purchase price.

Types of Mortgages

Pre-Approved Mortgages - Preliminary approval is given by the lender of the borrower's application for a mortgage to a certain maximum amount and usually with a guaranteed rate for a set period of time.

Rate-Improvement mortgage - A loan with a clause that entitles a borrower to a one-time cut in the interest rate without going through refinancing.

Leasehold Mortgage - A mortgage on a home and/or improvements where the land is rented rather than owned.

Conventional Mortgages - A loan for no more than 75 % of the appraised value or purchase price of the property, whichever is less.

High Ratio Mortgages - If you don't have 20% of the lesser of the purchase price or appraised value of the property, your mortgage must be insured against payment default by a Mortgage Insurer, such as the Canada Mortgage and Housing Corporation (CMHC).

First Mortgage - The debt registered against your property that has to be paid first in the event of sale or default.

Second Mortgage - A mortgage granted when there is already one other mortgage registered against the property. If the borrower defaults and the property is sold, the second mortgage is paid after the first mortgage.

Purchase Money Mortgage - A method of financing a home in which the buyer borrows from the seller instead of, or in addition to, a bank. It is sometimes used when a buyer cannot qualify for a bank loan for the full amount. It may also be referred to as seller financing or owner financing

Leasehold Mortgage - A mortgage on a home and/or improvements where the land is rented rather than owned.

Collateral Mortgage - A mortgage backed by a promissory note and the security of a mortgage on real property. The money borrowed is usually used for other purposes, such as home improvements, a vacation or a business investment.

Fixed Rate Mortgage - A mortgage for which the rate of interest is set for a specific period of time (the term of the mortgage). The regular payment of the principal and interest remains the same throughout the term.

Variable Rate Mortgage - A mortgage for which the rate of interest changes from time to time as money market conditions change. The amount of the regular payment of a variable rate mortgage does not change. The difference lies in the way the payment is applied. If interest rates go up, more of the regular payment will be applied toward interest. If interest rates go down, more of the regular payment will be applied toward the principal.

Open Mortgage -  An open mortgage allows you to pay off part or the entire mortgage at any time without penalties. Open mortgages usually have short terms of six months or one year. The interest rates are higher than those for closed mortgages with similar terms

Closed Mortgage - A mortgage that generally does not allow the borrower to repay the loan more quickly than agreed.

Portable Mortgage - A mortgage where the principal balance, the term remaining and the interest rate are transferred to a mortgage on your new property.

Blended Mortgage - Occurs when you combine the mortgage balance outstanding on the home you are leaving and adding additional financing to purchase your new home. The interest rate will change to one that combines the rate on your old mortgage with the rate in effect at the time you add additional financing. 

Convertible mortgage - A mortgage that you can change from short-term to long-term, depending on your financial needs.






There are no comments

Thank you! Your comment has been submitted and is awaiting approval.

The Hisey-McDermott Team

The Hisey-McDermott Team

Sales Representative
CENTURY 21 Miller Real Estate Ltd., Brokerage*
Contact Us

Blog Archives